Taiwan
17 September 2013
Sunil Daswani explains how best to take advantage of Taiwan
Image: Shutterstock
Taiwan remains one of Asia’s most vibrant securities lending markets, as demand for borrowing securities continues to exceed the available supply, inducing wide trading spreads and thus providing beneficial owners with an attractive revenue opportunity relative to other regional jurisdictions. Currently, for every $100 million in Taiwanese securities lent, beneficial owners earn approximately $504,000.
The nature of demand is largely hedge fund driven with a particular focus on three dominant strategies. First, there is robust demand for long term directional strategies associated with the technology sector, which accounts for the majority of the market capitalisation on the Taiwan Stock Exchange (TWSE) index. Such trading strategies are typically structured to gain exposure to the supply chain for various global technology giants such as Apple Inc. or Lenovo Group Ltd, with particular focus on the smartphone and computer industries. Second, given an abundance of both ADR (American depository receipt) and GDR (global depository receipt) issuances, relative value strategies are frequently structured to capitalise on any arbitrage opportunity associated with the price of the foreign depository receipt and the local line. Third, the deployment of statistical arbitrage trading remains prevalent, typically used to capitalise on intraday pricing inefficiencies. Given the level of market volatility in Taiwan, this remains an attractive strategy used by dedicated ‘stat-arb’ hedge funds.
The TWSE created a centralised securities borrowing and lending programme in June 2003. All participants are subject to the Taiwan Stock Exchange Corporation securities and borrowing lending regulations and are regulated by the country’s financial regulator. Although the market requires beneficial owners to work closely with agent lenders to enter this market, the potential revenue streams are compelling for investors.
To lend in the Taiwan market, a beneficial owner will need a local tax agent. Additionally, the beneficial owner will need to sign additional legal documents; an amendment to the securities lending authorisation agreement, a sub-custodian letter of authorisation and, if required, a multiple trading account request letter. A summary of these documents is provided below:
Íø±¬³Ô¹Ï Lending Authorisation Agreement (SLAA) Amendment—required to expand the existing SLAA between the beneficial owner and your securities lending agent to encompass the clauses required by the regulator to begin lending in Taiwan. The amendment consolidates the relevant points highlighted below, which are not currently covered in the SLAA.
a. Application of the TWSE rules for Taiwanese lending transactions
b. States that client is eligible to undertake Taiwan securities lending transactions which is approved and monitored by Taiwan regulators
c. Provides details of the account opening process
d. Explains the recall of lent securities and the manufactured dividend process
e. States the responsibilities of the client with regards to taxation
f. Provides your securities lending agent with the necessary authorisation to perform certain tasks on behalf of the client to ensure compliance with local regulations
Sub-Custodian Letter of Authorisation—this document is required by the sub-custodian to allow them to perform the required tasks to facilitate lending in this market. It states the following:
a. The applicable regulations relevant to lending transactions
b. Recognises sub-custodian as agent for the client in relation to lending transactions in Taiwan. This is necessary under Taiwan regulation although they have no discretionary role in lending activity.
c. Provides authority for sub-custodian to facilitate account opening and appointment of local brokers which must be completed locally in Taiwan
Multiple Trading Account Request Letter—your securities lending agent will typically operate a structure in Taiwan for clients with multiple investment managers for their Taiwanese assets whereby we will aggregate securities from different investment managers before delivering to the borrower in a single market transaction. It includes the following:
a. Name of FINI requesting account
b. Reason why account is being requested ie, to manage lending and borrowing activity.
The nature of demand is largely hedge fund driven with a particular focus on three dominant strategies. First, there is robust demand for long term directional strategies associated with the technology sector, which accounts for the majority of the market capitalisation on the Taiwan Stock Exchange (TWSE) index. Such trading strategies are typically structured to gain exposure to the supply chain for various global technology giants such as Apple Inc. or Lenovo Group Ltd, with particular focus on the smartphone and computer industries. Second, given an abundance of both ADR (American depository receipt) and GDR (global depository receipt) issuances, relative value strategies are frequently structured to capitalise on any arbitrage opportunity associated with the price of the foreign depository receipt and the local line. Third, the deployment of statistical arbitrage trading remains prevalent, typically used to capitalise on intraday pricing inefficiencies. Given the level of market volatility in Taiwan, this remains an attractive strategy used by dedicated ‘stat-arb’ hedge funds.
The TWSE created a centralised securities borrowing and lending programme in June 2003. All participants are subject to the Taiwan Stock Exchange Corporation securities and borrowing lending regulations and are regulated by the country’s financial regulator. Although the market requires beneficial owners to work closely with agent lenders to enter this market, the potential revenue streams are compelling for investors.
To lend in the Taiwan market, a beneficial owner will need a local tax agent. Additionally, the beneficial owner will need to sign additional legal documents; an amendment to the securities lending authorisation agreement, a sub-custodian letter of authorisation and, if required, a multiple trading account request letter. A summary of these documents is provided below:
Íø±¬³Ô¹Ï Lending Authorisation Agreement (SLAA) Amendment—required to expand the existing SLAA between the beneficial owner and your securities lending agent to encompass the clauses required by the regulator to begin lending in Taiwan. The amendment consolidates the relevant points highlighted below, which are not currently covered in the SLAA.
a. Application of the TWSE rules for Taiwanese lending transactions
b. States that client is eligible to undertake Taiwan securities lending transactions which is approved and monitored by Taiwan regulators
c. Provides details of the account opening process
d. Explains the recall of lent securities and the manufactured dividend process
e. States the responsibilities of the client with regards to taxation
f. Provides your securities lending agent with the necessary authorisation to perform certain tasks on behalf of the client to ensure compliance with local regulations
Sub-Custodian Letter of Authorisation—this document is required by the sub-custodian to allow them to perform the required tasks to facilitate lending in this market. It states the following:
a. The applicable regulations relevant to lending transactions
b. Recognises sub-custodian as agent for the client in relation to lending transactions in Taiwan. This is necessary under Taiwan regulation although they have no discretionary role in lending activity.
c. Provides authority for sub-custodian to facilitate account opening and appointment of local brokers which must be completed locally in Taiwan
Multiple Trading Account Request Letter—your securities lending agent will typically operate a structure in Taiwan for clients with multiple investment managers for their Taiwanese assets whereby we will aggregate securities from different investment managers before delivering to the borrower in a single market transaction. It includes the following:
a. Name of FINI requesting account
b. Reason why account is being requested ie, to manage lending and borrowing activity.
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